Email this article to a friend

Never regret, move on,â says Peter Lynch, chief financial officer of the recently refloated Eircom. Lynch is talking about his departure from Adare Printing, following a failed management buy-out attempt in 2000. His words might equally apply to his experience at Eircom.

The CFO Interview: Peter Lynch

It is just as well that Lynch, a straight-talking Belfast man, believes in looking forward, as for Eircom the recent past is pretty bleak. Lynch, along with most of Eircom’s original investors, lost a fortune when the company was taken private at the end of 2001, just over two years after its first flotation.

Half a million private investors bought shares in Eircom when it floated. Lynch was not among them. Instead, the CFO acquired €1.4m ($1.7m) worth of shares in early 2001 when he joined the company. “I like to take an interest in the companies I work for,” he says. His stake, he adds as an aside, was 20 times the size of the other Eircom directors’ holdings combined.

Within a year, Eircom fell spectacularly from grace and was eventually acquired by Valentia, a consortium led by Sir Anthony O’Reilly, the Irish tycoon, which included George Soros and Providence Equity Partners. Lynch lost E300,000.

Five years on from its first initial public offering, Eircom is a shadow of its former self. Since 2001, it has sold its mobile telecoms business Eircell to Vodafone, closed its internet businesses and brought in new management. In March, following more than two years in the chrysalis of private ownership, Eircom re-emerged as a listed company, having undergone what Lynch describes as a detox process. “We’ve been breaking bad habits and making sure they stay broken,” he says.

The company’s refloat was not a triumphal return to the market and was a far cry from its first, flamboyant IPO. In 1999, the company was valued at €7bn and had a share register that included a significant proportion of the Irish population, as well as a 35% stake held jointly by European telcos KPN and Telia. This time round, the company is worth just over €1bn and has deliberately avoided targeting retail investors.

Ironically, at the first flotation, Eircom’s shares were snapped up hungrily, rising from a fully valued €3.90 listing price. In March this year they were less enthusiastically received. Having been priced at the lower end of the expected range, at €1.50, the share price fell on opening. It has only just recovered the listing price.

While Lynch maintains that it was right to complete the IPO earlier this year, he believes too many banks were involved. He feels the company has not ended up with the right shareholder mix.

The core of the problem, he believes, was the banking group. Goldman Sachs and Morgan Stanley were joint sponsors and bookrunners, with Deutsche Bank and Citigroup also acting as bookrunners, and a larger selling group below them – a heavier-weight line-up than on the company’s first, much larger, float.

Keeping investment bankers busy seems to have become a habit for Eircom. It kept many bankers employed during the TMT slump in 2001, when a nine-month bidding war for the company involved at least 10 banks.

Eircom’s second IPO was code-named Project Mobius, after Escher’s drawing of the Mobius Strip, an infinite loop swarming with worker ants going round in circles. Lynch clearly has a black sense of humour.

This time, however, the investment banking overkill reflected the fact that the deal was driven by venture capital houses. As Lynch explains: “There are lots of relationships between venture capitalists and investment banks. At the size we were at, we couldn’t have got so much attention from big investment banks; the only reason was the venture capitalists. Investment banks, quite properly, are in love with venture capitalists – that’s where the business is. They have a symbiotic relationship.”

Venture capitalists’ power in the market allows them to pick and choose banks for each part of the deal. In Eircom’s case, Goldman Sachs, also a co-investor in Eircom, led the deal and set up the structure. Later, Morgan Stanley took over the reins and closed the deal.

“It over-complicated the deal because no single bank had a strong enough mandate to drive the process,” Lynch says.

The symbiotic relationship between banks and venture capitalists inflated the selling group for the flotation; the banks’ close ties to hedge funds affected the share register. Lynch says he was surprised by the number of hedge fund investors he met on the roadshow. “Their view of long term is the end of the month. Apparently, they account for 10% of the market, but it feels like 20%, and as much as 50% of trading in all shares,” he says. But the company had little control over which investors were allocated shares.

“The relationship between hedge funds and investment banks means that you can’t choose your investor base – the hedge funds will get the shares if they want them,” says Lynch. He reckons that he and Phil Nolan, Eircom’s chief executive, face a two to three-year job to get the right shareholder line-up – that is, long-term institutional holders.

Lynch is not hostile towards venture capitalists or investment bankers per se. He speaks highly, for example, of Paul Salem from Providence Equity Partners, whom he describes as a Gatsby-like figure with spot-on insight, or an Inuit in tune with his environment. “He has a sense of snow, a subtlety; he doesn’t accept the way things are,” he says. In particular, he credits Salem with the timing of last year’s refinancing and the IPO.

Lynch also praises Morgan Stanley’s execution and discipline. The bank’s Jean Abergel accompanied Lynch and Nolan on roadshows, and more than once told him off for what Lynch describes as “waxing lyrical” during meetings. “Jean would get in the car with you afterwards and say, ‘Can I have a word?’, and you knew you were about to get a ticking-off,” he recalls. He took vengeful satisfaction in the fact that Abergel, a Frenchman, was stopped and searched in almost every airport in the US.

Lynch respects Rothschild for its advice to Eircom’s Employee Share Option Trust (ESOT), which emerged from the Valentia deal with its Eircom stake doubled from 15% to 30%, thanks to the negotiations of Jeremy Boardman and Rupert Sadler. “They are super-fast and super-efficient. Their speed and read of the situation is amazing; they’re great. I’d use them if I could, but they are retained by ESOT,” he says.

On the debt side, Eircom is closest to Deutsche Bank. “We really like Deutsche,” says Lynch. No surprise there, as with €1.1bn of high-yield bonds outstanding and loans of €1.3bn, keeping good relationships with its lenders is of critical importance to the company.

That said, Lynch’s opinion of Merrill Lynch, once Eircom’s closest adviser, is harder to read. The bank led Eircom’s first IPO and was involved in both the Eircell and Valentia deals. It was also part of the selling group for the company’s most recent flotation. But many suspect the bank’s association with Eircom’s first IPO had killed off the relationship.

Lynch does not criticise the bank. He emphasises that Merrill was not being punished via its minor role in the refloat and says he feels no antipathy towards it. Rather he says times have moved on and teams have changed. “There are too many good people there; Merrill Lynch would be part of a beauty parade because you have to take it seriously. Besides, I don’t think there’s anyone here who remembers Merrill Lynch from first time round – it’s a brave new world,” he says.

Nevertheless, Lynch does not seem to have willingly engaged the bank as an adviser. When he joined Eircom in early 2001, Merrill was already advising on the Eircell sale, a deal that Lynch says he had no involvement in (to the extent that he declined a deal-related bonus on the sale). On the subsequent Valentia deal, however, he says Merrill, though formally appointed, was hardly involved. The main advisers were the corporate finance and broking arms of Dublin-based Goodbody and solicitors Arthur Cox.

“We were required by the board to bring in an international investment bank; Merrill Lynch was our adviser and we paid them €3m. They came to meetings and gave a fairness opinion, but they didn’t do much else. It was an exclusively Irish transaction – with millionaires Tony O’Reilly, Dermot Desmond and Denis O’Brien bidding for the company – and you needed to be Irish to understand it. It’s a local thing; it’s a local shop for local people,” says Lynch.

He recalls the negotiation process as being “gloves off” and he clearly relishes the cut and thrust of what he describes as “full metal jacket takeover battles”, where he says everyone reports everyone else to the takeover panel just to add spice.

Clearly, advising Eircom and in particular the quick-thinking and aggressive Lynch is not for the faint-hearted. Any advisers thinking of pitching for the possible acquisition of a mobile phone business – yes, another volte-face may be on the cards – should take note.